State-owned defence industrial group Denel on Wednesday, with the release of its yearly results, stated that its operating loss of R1.7-billion for the 2017/18 financial year clearly shows a business that has had a difficult year, marked by lapses in governance, mismanagement and poor contract execution that resulted in severe liquidity challenges.
The operating loss has been further compounded by R500-million in irregular expenditure and a disclaimer audit opinion by the Auditor-General which is of “grave concern” to Denel.
Revenue for the year dropped by 38% to R4.9-billion, compared with R8-billion in the prior year, with the decrease primarily the result of delays in two of the group’s major programmes. The development phases of these programmes were delayed, leading to cost increases and delays in production.
Export revenue decreased by 8% to R2.7-billion, mainly owing to reduced sales in the Asia-Pacific and Middle East regions.
The gross margin loss of 2.42%, compared with the prior year’s 22% margin, deteriorated as a result of the high base cost which could not be recovered as revenue and plant activity was at low levels.
The operating costs were under severe pressure, which included negative impacts brought on by foreign exchange losses of R273-million.
The decline in revenue led to reduced earnings before interest and taxes (Ebit) of R1.4-billion. This was against the backdrop of an increase in net finance costs to R292-million, largely as a result of the increased cost of borrowings.
The net loss was negated by the 46% increase in income from associates.
Total assets have decreased to R11-billion, compared with the prior year’s R12.5-billion, which was driven mainly by a decrease in cash and cash equivalents of R1.3-billion.
The company is undertaking a review of the cost base to ensure that the business is able to contain costs at a sustainable level.
A new board was appointed in April with a mandate to rebuild and strengthen governance, root out corruption and restore financial standing.
The board subsequently appointed a panel of forensic investigators to probe procurement irregularities. The irregular appointment of employees and business partners are also under investigation.
Additionally, Denel Asia is being unwound and Denel’s contracts with Gupta-linked VR Laser have been terminated.
On the plus side, Denel has a substantial order book at around R18-billion and a R40-billion order pipeline.
Working together with the departments of Defence and Public Enterprises, as well as the National Treasury, Denel is committed to delivering on its turnaround plan to set the group on a sustainable trajectory.